GRUPO FINANCIERO HSBC, S.A. DE C.V. FINANCIAL REPORT AS … · GRUPO FINANCIERO HSBC, S.A. DE C.V. FINANCIAL REPORT AS OF DECEMBER 31, 2005 2005 Results - Highlights ... brand, our

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México City. February 6, 2006.

GRUPO FINANCIERO HSBC, S.A. DE C.V. FINANCIAL REPORT AS OF DECEMBER 31, 2005

2005 Results - Highlights • Net income of MXN 4,981 million for the year ended 31 December 2005, an increase of

47.8 per cent over the previous year. • Return on average common equity of 22.1 per cent for 2005, compared with 15.7 per cent

in 2004. • Cost: income ratio of 61.8 per cent in 2005, improving from the previous year’s 66.4 per

cent (adjusted for a non-recurrent VAT recovery received in 2004). • Total assets of MXN 275.1 billion at 31 December 2005, compared with MXN 227.8

billion at 31 December 2004. Overview – Commentary by Sandy Flockhart, CEO & Group General Manager ¨Grupo Financiero HSBC reported strong 2005 results, with YTD net income amounting to 4,981 million pesos, representing an increase of 47.8 per cent over prior year. Results in the Bank continued to exceed expectations, due to robust revenue growth across all product categories. Net interest income, fees and trading all reached record levels during the year. This was coupled with strong performances in our Insurance, Afore, and Panama Bank subsidiaries. Growth of 28.3 per cent in net interest income, from MXN 11,845 million to MXN 15,193 million, was driven by higher deposit balances and widening spreads, strong loan growth, and higher average interest rates than in 2004. The net interest margin improved from prior year largely due to an increase in the bank’s margin from 6.3 per cent in 2004 to 6.8 per cent in 2005.

Fees and commissions increased by 10.7 per cent over the previous year due to growth in credit cards, electronic banking, ATMs, membership programmes, commercial lending, Afore pension fund management, trade services and remittances. Trading results were excellent, up 49.3 per cent over 2004, benefiting from successful strategic positioning, higher customer volumes and the launch of new products on the back of enhanced treasury systems. Administrative expenses grew 19.6 per cent (excluding the non-recurrent recovery of VAT received in 2004) as HSBC continued to invest heavily in its Mexican operations. Personnel

Financial Information as of December 31, 2005

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costs increased due to additional headcount and variable compensation to support revenue growth and to improve customer service. Operating costs were driven by significant investment in systems and higher marketing expenses. Loan impairment charges increased 9.4 per cent for the year, in line with robust lending growth and reflecting the high credit quality of new lending and improved economic conditions. In the bank, the ratio of non-performing loans to total loans decreased to 2.7 per cent, compared with 3.0 per cent in the previous year, and the reserve coverage on non-performing loans was 168 per cent. The bank’s capital adequacy ratio remained solid at 14.3 per cent at 31 December 2005. By customer segment The personal financial services division reported a solid performance due to higher deposit balances and widening spreads, strong loan growth and higher fee income. Fixed rate mortgage volumes increased 151 per cent over the previous year, driven mainly by the bank’s low rate offer. HSBC remains Mexico’s market leader amongst banks in auto loans issued. A unique new internet-based product, ‘Venta Directa’, was launched during the year, enabling the direct sales of used cars between customers, using HSBC’s financing and the website as the intermediary. HSBC is also the first Mexican bank to offer pre-approved personal loans through its ATMs, which helped grow balances by 109 per cent compared with 2004. Targeted customer campaigns drove record growth in credit cards, with balances 84 per cent higher and cards in circulation increasing by 80 per cent to 1.1 million cards. HSBC’s market share in customer deposits continued to increase, reaching record highs in 2005. This was accomplished while maintaining a cost of funds significantly below that of the market. The bank saw good growth of Tu Cuenta, an integrated package of financial services for a flat monthly fee. Since its launch in February, it has generated 611,000 accounts, averaging some 2,300 new customers per day. Mutual fund balances were up 58 per cent from the previous year, benefiting from an expanded product offering and increased cross sales to our extensive customer base. The HSBC D-2 fund is now the largest mutual fund for individual investors in Mexico, with assets of over MXN 20 billion at year end. The Afore pension funds business continued to perform strongly, with 394,000 new customers which led to a 50 per cent growth in fees. In the insurance company, growth in premiums was attributed to strong sales in packaged products in personal financial services (including mortgages, credit cards and Tu Cuenta) which have imbedded insurance components. Fee income from international remittances rose 55 per cent due to the continued success of La Efectiva, HSBC’s electronic remittance card. Monthly transactions now exceed one million, representing a market share among banks of approximately 20 per cent and a five-fold increase since acquisition. We continue to leverage HSBC’s extensive branch network in the US to create growth opportunities. In commercial banking, deposit balances grew by 38 per cent as a result of the expansion into the SME market. Loan balances rose by 21 per cent, principally in the services and commerce


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sectors due to the increase in new clients. Trade services increased its market share, generating revenue growth of 39 per cent over the previous year. The recently launched Estímulo combined loan and overdraft product for smaller companies has been very successful, with over 3,500 packages sold with an average cross-sale of 4.6 products. The corporate, investment banking and markets division continued to strengthen its market position with lending growth of MXN 11,890 million, or 90 per cent, over 2004, benefiting in part from HSBC’s extensive international network for multinational companies. HSBC was officially appointed market maker in debt trading desk by the Central Bank and is now ranked third in the Mexican FX market. The installment of new treasury systems in early 2005 allowed HSBC to operate derivatives in Mexico, which has contributed strong earnings for the year. HSBC’s newly-formed Group Investment Banking Financing (GIBF) won mandates to arrange and underwrite the securitisation of mortgages and bridge loans. GIBF also underwrote and placed the company’s first local bond issue for Petroleos Mexicanos and successfully sole lead arranged a 10-year MXN 2 billion bond for the Inter-American Development Bank. In conclusion ¨Having passed the 3 year anniversary of the Bital acquisition, I am very pleased with the progress made to date. Leveraging the knowledge, network and brand of the HSBC Group alongside the experience and capabilities of our Mexican colleagues has been a powerful driver for executing change and generating results in Mexico. Nevertheless, HSBC continues to work towards being the number one financial services institution in México in the eyes of our customers. Numerous initiatives are underway to improve customer service and to strengthen the bank’s product offerings in order to support the future financial requirements of our customers.¨ The HSBC Group Grupo Financiero HSBC, S.A. de C.V. is Mexico’s fourth largest banking and financial services institution with 1,400 branches, 5,000 ATMs, 6 million customers and more than 22,000 employees. For more information, consult our website at www.hsbc.com.mx. Grupo Financiero HSBC, S.A. de C.V. is a directly controlled subsidiary of, and 99.8 per cent owned by, HSBC Holdings plc. Headquartered in London, UK, the HSBC Group serves over 110 million customers worldwide through 9,700 offices in 77 countries and territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Africa. With assets of US$1,467 billion at 30 June 2005, HSBC is one of the world’s largest banking and financial services organisations. HSBC is marketed worldwide as ‘the world’s local bank’. Basis of Presentation: These consolidated financial statements have been prepared in accordance with Mexican generally accepted accounting principles, with figures denominated in Mexican Pesos (MXN).


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Forward-Looking Financial Informtion: This document contains forward-looking statements, including statements regarding the business and anticipated financial performance of Grupo Financiero HSBC, S.A. de C.V. (GF HSBC). These statements are subject to a number of risks and uncertainties that may cause actual results to differ materially from those contemplated by the forward-looking statements. Some of the factors that could cause such differences include legislative or regulatory developments, technological change, global capital market activity, changes in government monetary and economic policies, changes in prevailing interest rates, inflation levels and general economic conditions in geographic areas where GF HSBC operates. Mexico is a competitive banking environment and pressures on interest rates and our net margin may arise from actions taken by individual banks acting alone. Varying economic conditions may also affect equity and foreign exchange markets, which could also have an impact on our revenues. The factors disclosed above may not be complete and there could be other uncertainties and potential risk factors not considered here which may impact our results and financial condition Media enquiries to: London Karen Ng/Richard Beck Tel: +44 (0) 20 7991 0655/0633 Mexico City Roy Caple Tel: +52 (55) 5721 6060 Investor relations: London Patrick McGuinness Tel: +44 (0) 20 7992 1938 Mexico City Geoffrey Fichte Tel: +52 (55) 5721 5567


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Contents HSBC’s Corporate Social Responsibility Programme in Mexico ........................................ 5 Grupo Financiero HSBC, S.A. de C.V. ................................................................................... 8

Consolidated Balance Sheet ......................................................................................... 8 Consolidated Income Statement ................................................................................ 11 Consolidated Statement of Changes in Shareholder´s Equity................................ 12 Consolidated Statemet of Changes in Financial Position........................................ 13 Key Indicators ............................................................................................................. 14

Banking Sector ........................................................................................................................ 15 Consolidated Balance Statement ............................................................................... 15 Consolidated Income Statement ................................................................................ 18 Consolidated Statement of Changes in Shareholder’s Equity................................ 19 Consolidated Statement of Changes in Financial Position...................................... 20 Key Indicators ............................................................................................................. 21

Variance Analisis of Balance Sheet and Income Statement................................................ 22 Financial Instruments............................................................................................................. 24 Participation by Subsidiary ................................................................................................... 26 Trading Income....................................................................................................................... 26 Loan Portfolio.......................................................................................................................... 26 Loan Portfolio Grading .......................................................................................................... 27 Non-performing Loans ........................................................................................................... 28 Deferred Taxes ........................................................................................................................ 28 Funding, Loans and Investment in Securities ...................................................................... 29 Long Term Debt...................................................................................................................... 29 Capital...................................................................................................................................... 29 Capital Ratio............................................................................................................................ 30 Other Expenses, Other Income and Extraordinary Items.................................................. 31 Related Party Transactions.................................................................................................... 32 Information on Customer Segment and Results ................................................................. 32 Market Risk Management ..................................................................................................... 34 Accounting differences in IAS vs. Mexican GAAP.............................................................. 38


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HSBC’s Corporate Social Responsibility Programme in Mexico For HSBC, Corporate Social Responsibility (CSR) means conducting our business in a responsible manner and maintaining the highest ethical standards in our relations with customers, employees, investors and suppliers; to complying with the laws of the countries were we operate; respecting human rights; contributing to environmental conservation by managing our direct impact, as well as applying environmental standards to our financing; and supporting the communities in which we operate. Our aim in Mexico is to be the “leading financial services company in Mexico in the eyes of our customers”. By leading, we mean preferred, admired, and dynamic, recognizing the strength of our brand, our corporate character, and our earnings growth. Our strategy, ¨Managing for Growth¨ is an aggressive road map for marshalling our resources in the best interests of customers, shareholders, staff, and other stakeholders. HSBC’s core values are integral to achieve this goal. These values comprise of a preference for long-term, ethical client relationships, personal integrity, and the continuous drive to improve customer service. In Mexico, HSBC has also begun to implement the guidelines established by the Group that require environmental standards to be taken into account in project financing, as well as in corporate and business loans which could have an effect on the environment. HSBC Mexico’s community programmes focus on education, healthcare, the environment, the arts and relief work. We consider that these are the areas where we can have the highest impact. These are some of HSBC Mexico’s major programmes: Education Through the British Mexican Friendship Society (Amistad), HSBC Mexico is donating USD 1.5 million over a five-year period to support secondary, technical and preparatory schools throughout Mexico. This includes the annual adoption of four schools around the country in order to improve buildings, equipment, programmes and fostering exchange visits for gifted children with schools in the United Kingdom. Annually, this impacts the education of over 20,000 students. HSBC Mexico also donated USD 1 million to be used over the next five years for the construction and operation of the AMISTAD ABC CLINIC operating in the new facility which the ABC Hospital built in Santa Fé. The clinic will provide health care services to more than 7,000 members of the surrounding communities who do not have access to public or private health care systems. HSBC Mexico with the American School Foundation is also funding the HSBC ASF English as a Second Language Teaching Academy, which will provide 240 public school teachers with the latest teaching skills and methodology, in teaching English to their students. We expect more than 80,000 students from public schools, on an annual basis, to benefit from this programme. Through the Mexican Banking Association, HSBC participates with other financial institutions in supporting programmes for street and homeless children, which provide counselling to address


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addictions, psychological and educational support, as well as preparing them to enter the work force, and helping integrate them back in to society. The Environment In terms of HSBC Mexico’s participation in environmental programmes, in 2005, more than 30 members of our staff participated in the ongoing HSBC Group programme with Earthwatch, of which more than 87 colleagues have participated in since 2003. This project has identified more than 25,000 flora and fauna species in a five year period around the world. Additionally, Mexico will benefit from the USD 17 million commitment made by HSBC Group to the World Wildlife Fund to study the problems and solutions of the pollution in three major rivers around the world, one of them being the Río Bravo on the Mexico-U.S. border. HSBC Mexico is also working on its direct impact on the environment, through the construction of a new headquarter building in Mexico City, which will save energy, in order to reduce atmospheric emissions, recycle water, and manage waste. We expect this to be the most environmental friendly building in Mexico and Latin America. The Arts HSBC Mexico has also been active in supporting cultural activities, as they are tied to education, as well to a country’s identity, its past, present and future. This year HSBC Mexico and the HSBC Group sponsored the exhibits of Frida Kahlo at the Tate Modern Museum in London, as well as that of Henry Moore in Mexico, which was on display at the Dolores Olmedo Patiño Museum in Mexico City. HSBC Mexico also co-sponsored four Mexican theatre works that were presented by the Anglo Mexican Foundation at the Riverside Studios of London, and the Fringe Fest, within the Edinburgh Theatre Festival during the summer of 2005, one of the most important international theatre festivals in the world. Furthermore, HSBC donated the construction of the replica of the court for the Prehispanic Ball Game, which was built on the grounds of Mexico’s prestigious Museo Nacional de Antropología (National Museum of Anthropology), and will be seen by more than 1,600,000 people, which include thousands of students and tourists that visit the Museum annually. Customer Donations Through our ATM donations programme, branded as Niños con Futuro, each time our customers use an ATM, they have the option to donate specific amounts of money, which is channelled to different charity organisations in six regions of the country. The programme is aimed at supporting institutions that focus on improving underprivileged children’s quality of life in three areas: education, healthcare and nutrition. HSBC absorbs the operating costs of the programme. Since the ATM programme began it has helped more than 79,100 children in the areas of education and healthcare. From November, 2002 to June 28, 2005, the programme has collected MXN 47 million. The programme received a best community practice award in 2004 from the Mexican Centre for Philanthropy (CEMEFI) and Alliarse.


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Relief Efforts At present, HSBC Mexico is providing support to the communities and customers in Southeast Mexico, whom were affected by Hurricanes Stan and Wilma. This includes two accounts set up for employee donations, one for Chiapas, the other for the Yucatán Penisula. These contributions will be matched by the bank, and channelled through relief organisations helping children affected in the region. An account for client donations was set up with FAI Save the Children, and our ATM’s have been adapted to accept donations for the region. In addition, HSBC has joined other banks in supporting clients in the area, by providing grace periods for personal loans, as well as working together with our Commercial and Corporate clients, to help them through this difficult period.

In Conclusion

As ¨the world’s local bank¨, HSBC fully recognises the importance of our wider obligations to society and calls for the increasing involvement of our colleagues in corporate social responsibility, especially in our support of education, health, and the environment.


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Grupo Financiero HSBC, S.A. de C.V. Figures in MXN millions

Consolidated Balance Sheet

31Dec 2004

31 Mar2005

30 Jun 2005

30 Sep 2005

31 Dec 2005

Assets Cash and deposits in banks ......................................... 47,089 52,673 45,352 49,143 55,291 Financial instruments .................................................. 47,546 37,954 47,001 49,983 56,960 Trading securities 3,065 366 346 4,837 6,945 Available for sale securities 40,334 33,573 42,588 41,153 46,022 Securities held to maturity 4,147 4,015 4,068 3,993 3,993 Securities and derivative operations............................ 112 381 137 267 568 Repurchase agreements 69 109 101 93 186 Stock borrowings - - - - - Settlement accounts to be recorded for purchase - - - - - Derivative transactions 43 271 36 173 382 Performing loans ………………………………….. Commercial loans 31,330 35,343 41,081 44,778 45,751 Loans to financial intermediaries 4,270 3,501 4,236 5,191 6,896 Consumer loans 16,480 17,060 17,991 19,973 25,660 Mortgage 16,640 17,201 17,775 18,921 20,099 Loans to government entities 6,478 7,336 36,536 36,893 36,163 Loans to Fobaproa or IPAB 43,020 43,099 18,591 947 1,096 Total performing loans ……………………………. 118,217 123,539 136,211 126,703 135,665 Non-performing loans Commercial loans 1,993 2,033 1,963 1,754 1,667 Loans to financial intermediaries - - - - - Consumer loans 549 556 635 683 818 Mortgage 919 850 972 1,135 1,021 Loans to government entities - - - - - Immediate collection, remittances and other 42 75 47 30 28 Total non-performing loans ……………………….. 3,503 3,515 3,616 3,601 3,534 Total loan portfolio ………………………………... 121,720 127,054 139,827 130,304 139,199 (-) Allowance for loan losses……………………… (6,758) (6,550) (6,409) (6,137) (5,897)Net loan portfolio ........................................................ 114,962 120,505 133,418 124,168 133,302 Other accounts receivable ........................................... 4,499 11,423 21,099 9,713 15,218 Foreclosed assets......................................................... 562 525 467 446 394 Property, furniture and equipment, net........................ 4,350 4,585 4,816 5,110 5,475 Long term investments in equity securities ................. 2,306 2,431 2,398 2,066 2,245 Deferred taxes ............................................................. 2,274 2,077 1,686 1,278 747 Goodwill…………………………………………… 3,148 3,132 3,112 3,182 3,239 Other assets, deferred charges and intangibles............ 927 902 920 928 1,683 Total Assets 227,776 236,587 260,406 246,284 275,122


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31Dec 2004

31 Mar2005

30 Jun 2005

30 Sep 2005

31 Dec 2005

Liabilities Deposits ...................................................................... 185,182 182,094 192,218 193,826 212,316 Demand deposits 115,401 106,456 108,636 108,047 125,513 Time deposits 69,726 75,638 83,582 85,779 86,803 Bank bonds outstanding 56 - - - - Bank deposits and other liabilities .............................. 9,244 10,418 16,876 7,040 6,963 On demand - - - - 21 Short term 6,619 7,972 14,519 4,884 4,816 Long term 2,625 2,446 2,356 2,156 2,126 Settlement accounts to be recorded for sale ………. - 257 1,738 - - Securities and derivative transactions ......................... 41 96 3,933 2,979 4,502 Repurchase agreements 41 96 49 88 113 Stock borrowings - - 3,884 2,890 4,389 Derivative transactions - - - - - Settlement accounts to be recorded for purchase - - - - - Other accounts payable ............................................... 9,807 19,443 20,072 15,354 22,959 Income tax and employee profit sharing payable 742 455 203 394 1,298 Sundry creditors and others accounts payable 9,065 18,988 19,869 14,960 21,661 Subordinated debentures outstanding……………... 2,675 2,662 2,645 2,618 2,579 Deferred tax ................................................................

......................................................................... - - - - - Deferred credits .......................................................... 86 64 53 15 20 Total Liabilities ......................................................... 207,036 215,034 237,535 221,832 249,339 Stockholder´s Equity Paid in capital ............................................................. 19,853 19,853 19,853 19,853 19,853 Capital stock 7,593 7,593 7,593 7,593 7,593 Additional paid in capital 12,260 12,260 12,260 12,260 12,260 Mandatorily convertible subordinated debentures - - - - - Capital Gains .............................................................. 884 1,697 3,015 4,597 5,928 Capital reserves 465 465 634 634 634 Retained earnings 4,437 7,808 7,640 7,640 7,640 Surplus (Deficit) from securities - - - - - Results of foreign operations exchange (1) - (4) (4) (7) Cumulative effect of restatement (3,690) (3,691) (3,690) (3,690) (3,690) Gains on non monetary asset valuation Valuation of fixed assets - - - - - Valuation of permanent investments (3,698) (4,065) (3,810) (3,585) (3,630) Adjustments to retirement fund obligations - - - - - Net Income 3,370 1,179 2,245 3,601 4,981 Minority interest in capital.......................................... 3 3 3 3 2 Total Stockholder’s Equity ......................................... 20,740 21,553 22,871 24,453 25,783 Total Liabilities and Capital .................................... 227,776 236,587 260,406 246,284 275,122


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31Dec 2004

31 Mar2005

30 Jun 2005

30 Sep 2005

31 Dec 2005

Memorandum Accounts Transactions on behalf of third parties 78,248 87,779 91,153 84,422 86,016 Customer current accounts (4) (7) 3 (3) 1 Customer banks 1 1 - - - Settlement of customer securities and documents (5) (8) 3 (3) 1 Customer securities 50,009 52,551 59,958 65,172 66,738 Customer securities in custody 49,433 51,737 59,144 63,766 65,592 Pledged customers securities and documents 575 813 814 1,406 1,146 Transactions on behalf of customer 2,619 2,522 2,669 2,572 2,411 Customer repurchase transactions 2,619 2,522 2,669 2,572 2,411 Customer option repurchase transaction - - - - - Other transactions on behalf of customers 25,624 32,713 28,522 16,681 16,866 Investment on behalf of customers, net 25,624 32,713 28,522 16,681 16,866 Other memorandums accounts 440,454 456,676 490,375 448,878 481,483 Investment of the SAR funds 2,958 3,122 3,174 3.264 3,292 Integrated loan portfolio 115,148 119,799 131,940 121,721 131,294 Other memorandum accounts 322,348 333,755 355,261 323,893 346,897 Transactions for the group’s own accounts 226,047 330,725 343,814 396,109 339,597 Memorandum Accounts 226,020 330,712 343,762 396,103 339,524 Guarantees granted 224 191 58 59 57 Irrevocable lines of credit granted 2,257 3,155 2,820 3,218 3,761 Goods in trust or mandate 63,606 64,468 65,830 66,886 67,769 Goods in custody or under administration 50,566 52,137 61,578 62,098 56,937 Amounts committed in transactions with Fobaproa 983 889 1,070 470 123 Amounts contracted in derivative operations 94,647 194,456 196,579 254,176 205,915 Securities in custody 4,082 4,066 4,070 4,073 3,986 Other contingent obligations 9,654 11,350 11,758 5,124 976 Repurchase/resale agreements 39,776 39,705 45,612 43,839 44,434 Securities receivable under repos (39,749) (39,738) (45,559) (43,827) (44,450) (less) Repurchase agreements 28 (33) 53 12 (16) Reverse repurchase agreements 8,836 10,216 14,230 14,217 15,944 (less) Securities deliverable under repos (8,836) (10,169) (14,231) (14,223) (15,855) - 46 (1) (6) 89 The present balance statement was prepared in accordance to the accounting principles for banking institutions, which are issued by the Mexican National Banking Commission as specified in Article 30 of the Law for Credit Institutions, of general observance and mandatory, applied in a consistent manner, this statement reflects all operations performed by the institution up to the date mentioned above, these operations were performed following healthy banking practice and following applicable legal and administrative requirements. The present statement has been approved by the Board of Directors under the responsibility of the signing officers. Historical paid in capital of the Institution amounts to MXN 3,886 millions. www.hsbc.com.mx, Section: English, HSBC Group, Investor Relations, Financial Information. www.cnbv.gob.mx/Sector Bancario/Instituciones de Crédito/Información Financiera de la Banca Múltiple, Section: Información Estadística


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Consolidated Income Statement For the querter ending…. YTD

31 Dec 2004

31 Mar2005

30 Jun 2005

30 Sep 2005

31 Dec 2005

31 Dec 2004

31 Dec 2005

Interest Income 5,565 5,892 6,549 7,018 6,891 19,393 26,350 Interest expense (-) 2,054 2,200 2,915 3,007 2,715 7,197 10,837 Monetary position (margin), net (187) (51) (22) (74) (173) (351) (320) Net interest income ............................. 3,324 3,640 3,612 3,938 4,003 11,845 15,193 Loan-loss provisions (-) (276) (247) (369) (481) (403) (1,370) (1,499) Risk adjustment net interest income.... 3,048 3,394 3,243 3,457 3,600 10,475 13,694 Fees and commissions......................... 2,101 1,960 1,984 2,240 2,252 7,616 8,435 Fees Paid ............................................. (215) (212) (235) (216) (254) (637) (917) Trading Income ................................... 248 218 288 418 439 913 1,363 Total operating income........................ 5,182 5,360 5,279 5,899 6,037 18,367 22,575 Administrative and personnel expenses (-) ......................................... 3,759 3,680 3,867 4,125 4,158 12,987 15,830 Net operating income .......................... 1,423 1,680 1,413 1,774 1,879 5,380 6,745 Other income 536 222 280 552 441 1,363 1,495 Other expenses (458) (173) (121) (466) (261) (1,076) 1,021 Net income before taxes. ..................... 1,501 1,729 1,572 1,860 2,059 5,666 7,219 Income tax and employee profit sharing (571) (281) (401) (477) (331) (1,247) (1,491) Deferred income tax (230) (387) (198) (256) (505) (1,270) (1,346) Net income before subsidiaries ........... 700 1,061 972 1,126 1,223 3,149 4,382 Undistributed income from subsidiaries 98 119 171 229 157 228 675 Income from ongoing operations ........ 798 1,179 1,143 1,356 1,380 3,377 5,057 Discontinued operations, extraordinary items and changes in accounting standards, net - - (78) - - (7) (78) Minority interest - - - - - - - Net income (loss) ................................ 798 1,179 1,066 1,356 1,380 3,370 4,981 "The consolidated income statement, with those of the other financial entities comprising the Group that are subject to consolidation, were prepared in accordance with the accounting criteria for financial group holding companies issued by the National Banking and Securities Commission based on Article 30 of the Law that Regulates Financial Groups, which are of a general and mandatory nature and have been applied on a consistent basis. Accordingly, they reflect the transactions carried out by the Holding Company and the other financial entities comprising the from that are subject to consolidation, up to the dates mentioned above. Furthermore, these transactions were carried out and valued in accordance with sound banking practices and the applicable legal and administrative provisions. This consolidated income statement was approved by the Board of Directors under the responsibility of the following officers., Sección: Ligas de Interés, HSBC www.hsbc.com.mx English, Investor Relations – Financial Information. www.cnbv.gob.mx/Sector Bancario/Instituciones de Crédito/Información Financiera de la Banca Múltiple, Section: Información Estadística.


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Consolidated Statement of Changes in Shareholder´s Equity From January 1, 2005 to December 31,2005.

Paid in Capital Capital Gains

Capital stock

Shares Premium

Additional paid-in capital

Capital Reserves

Retained earnings

Surplus (Deficit)

from securities

Results of foreign

operations exchange

Cumulative effect of

restatement

Results from holding non-

monetary assets(Valuation of fixed assets)


monetary assets

(Valuation of permanent

investments)

Adjustments to retirement

fund obligations

Net income

Minority Interest

Total Stock-holders Equity

Balances as of December 31, 2004 7,593 12,260 - 466 4,437 - (1) (3,691) - (3,698) - 3,371 3 20,740

Movements Inherent to the Shareholders Decision - - - - - - - - - - - - - -

Subscription of shares - - - - 3,371 - - - - - - (3,371) - -Capitalization of retained earnings - - - 168 (168) - - - - - - - - -Constitution of reserves - - - - - - - - - - - - - -Payment of dividends - - - - - - - - - - - - - -Others - - - 168 3,202 - - - - - - (3,371) - -

Total

Movements for the Recognition of the Comprehensive Income

- - - - - - - - - - - 4,981 - 4,981 -Net result - - - - - - - - - - - - - - -Surplus from mark to market of available for sale securities - - - - - - (6) - - - - - - (6) -Result from translation of foreign operations - - - - - - - 2 - - - - (1) 1 -Cumulative effect of restatement - - - - - - - - - 67 - - - 67 -Gains on non-monetary asset valuation - - - - - - - - - - - - - - -Adjustments to retirement fund obligations - - - - - - (6) 2 - 67 - 4,981 (1) 5,043

Balances as of December 31, 2005 7,593 12,260 - 634 7,640 - (7) (3,689) - (3,631) - 4,981 2 24,783

The present statement of changes in stockholder’s equity, with those of other financial entities comprising the Group that are subject to consolidation, was prepared in accordance with the accounting criteria for financial group holding companies issued by the national Banking and Securities Commission based on Article 30 of the Law that Regulates Financial Groups, which are of a general and mandatory nature and have been applied on a consistent basis. Accordingly, they reflect the transactions carried out by the Holding Company and the financial entities comprising the group that are subject to consolidation, up to the dates mentioned above. Furthermore, these transactions were carried out and valued in accordance with sound banking practices and the applicable legal and administrative provisions. The present statement of changes in stockholder’s equity was approved by the Board of Directors under the responsibility of the following officers. www.hsbc.com.mx, English, Investor Relations – Financial Information. www.cnbv.gob.mx, Sector Bancario, Instituciones de Crédito, Información Financiera de la Banca Múltiple.


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Consolidated Statemet of Changes in Financial Position From January 1, 2005 to December 31,2005. Operating activities Net income (loss) ........................................................................................................................ 4,981Items included in operations not requiring (providing) funds:

Gains / (losses) from mark to market valuations (1,352)Allowances for loan losses 1,499Depreciation and amortization 849Deferred taxes 1,346Undistributed income from subsidiaries,net (675)Increase (reduction) of the minority interest -

Net Result of items included in operations not requiring (providing) funds.................... 6,648Changes in items related to operations: Increase (decrease) in deposits: 27,134Increase (decrease) of loan portfolio (19,838)Increase (decrease) of securities and derivative transactions, net (8,062)Increase (decrease) of financial instruments 4,004Other accounts receivable 2,432 Funds provided by operating activities ............................................................................... 12,318 Financing Activities: Subordinated debentures outstanding (96)Increase (Decrease)in bank and other loans (2,281) Funds used or provided in financing activities ................................................................... (2,377) Investing Activities: Increase (decrease) of property, furniture and equipment, net (1,273)Increase (decrease) in deferred charges or credits, net (472)Other investment activities 6 Funds used in investing activities......................................................................................... (1,739)Increase (decrease) in cash and equivalents: 8,202Cash and equivalents at beginning of period: 47,089Cash and equivalents at end of period......................................................................................... 55,291 "The present consolidated Statement of changes in financial position, with those of other financial entities comprising the Group that are subject to consolidation, was prepared in accordance with the accounting criteria for financial group holding companies issued by the National Banking and Securities Commission based on Article 30 of the Law that Regulates Financial Groups, which are of a general and mandatory nature and have been applied on a consistent basis. Accordingly, they reflect the transactions carried out by the Holding Company and the financial entities comprising the group that are subject to consolidation, up to the dates mentioned above. Furthermore, these transactions were carried out and valued in accordance with sound banking practices and the applicable legal and administrative provisions. This consolidated Statement of changes in financial position, was approved by the Board of Directors under the responsibility of the following officers. www.hsbc.com.mx, English, Investor Relations – Financial Information. www.cnbv.gob.mx/Sector Bancario/Instituciones de Crédito/Información Financiera de la Banca Múltiple, Section: Información Estadística.


14

Grupo Financiero HSBC, S.A. de C.V.

Key Indicators For the quarter ending…

31Dec

200431 Mar

200530 Jun

200530 Sep

200531 Dec

2005

Non performing loans / total loans ratio … 2.9% 2.8% 2.6% 2.8% 2.5% Coverage ratio …..………………………. 192.9% 186.4% 177.3% 170.4% 166.8% Operating efficiency..................................................... 6.7% 6.3% 6.2% 6.5% 6.4% Net interest margin (NIM) ........................................... 5.7% 6.3% 5.7% 6.1% 5.8% Return on average equity (ROAE) ……… 15.7% 22.3% 19.2% 22.9% 22.07% Return on assets (ROA) ............................................... 1.4% 2.0% 1.7% 2.1% 2.1% Capitalization ratio Credit risk.................................................................. 20.2% 19.6% 19.8% 19.2% 21.1% Credit and market risk............................................... 13.7% 15.0% 14.6% 13.4% 14.3% Liquidity....................................................................... 74.2% 75.7% 71.7% 84.2% 83.1% Non performing loans / total loans ratio = Balance of non performing loans at quarter end / Balance of total loans at quarter end. Coverage ratio= Balance of provisions for loan losses at quarter end / Balance of non performing loans at quarter end. Operating efficiency = Annualized administrative expenses at quarter end / Average total assets. ROE = Annualized net income at quarter end / Average shareholder’s equity. ROA = Annualized net income at quarter end / Average total assets. Capitalization ratio = Net Capital / Risk weighted assets. Liquidity = Liquid assets / Liquid liabilities. Liquid Assets = Cash and deposits in banks + Trading securities + Available for Sale securities. Liquid Liabilities = Demand deposits + Bank deposits and other on demand + Bank deposits and other short term liabilities. NIM = Annualized net interest income / Average total assets. Performing Assets = Cash and deposits in banks + Investment in securities + Derivatve Operations + Performing loans. The averages utilized correspond to the average balance of the quarter in study and the balance of the previous quarter.


15

Banking Sector HSBC México, S.A.

Figures in MXN millions

Consolidated Balance Statement

31 Dic

200431 Mzo

200530 Jun

200530 Sep

200531 Dic

2005Assets Cash and deposits in banks ....................................... 44,628 50,044 42,496 47,106 51,033

Financial instruments ................................................ 45,530 36,757 45,519 48,135 55,523 Trading securities 2,729 - - 4,158 6,589 Available for sale securities 38,654 32,743 41,450 39,984 44,941 Held to maturity securities 4,147 4,014 4,069 3,993 3,993

Securities and derivative operations.......................... 103 381 131 252 573 Repurchase agreements 59 109 95 79 191 Stock borrowings - - - - - Settlement Accounts to be recorded for purchase - - - - - Derivative transactions 44 272 36 173 382

Performing loans Commercial loans 28,166 30,676 36,275 39,609 40,733 Loans to financial intermediaries 4,131 3,400 4,143 5,100 6,797 Consumer loans 15,142 15,770 16,776 18,246 23,954 Mortgage 12,355 12,770 13,247 14,170 15,319 Loans to government entities 6,478 7,336 36,536 36,892 36,162 Loans to Fobaproa or IPAB 43,019 43,101 18,591 946 1,097 Total performing loans 109,291 113,053 125,568 114,963 124,062 Non-performing loans Commercial loans 1,943 1,992 1,918 1,708 1,624 Loans to financial intermediaries - - - - - Consumer loans 540 549 623 673 807 Mortgage 851 784 906 1,070 955 Loans to government entities - - - - - Immediate collection, remittances and other 42 75 47 31 27 Total non-performing loans 3,376 3,400 3,494 3,482 3,413 Total loan portfolio 112,667 116,453 129,062 118,445 127,475 (-) Allowance for loan losses (6,588) (6,376) (6,256) (5,984) (5,729)Net loan portfolio ...................................................... 106,079 110,077 122,806 112,461 121,746 Other accounts receivable ......................................... 4,054 10,561 19,785 8,715 14,677 Foreclosed assets....................................................... 510 470 420 403 354 Property, furniture and equipment, net...................... 4,116 4,354 4,599 4,888 5,240 Long term investments in equity securities ............... 401 395 171 175 196 Deferred taxes ........................................................... 2,199 1,968 1,562 1,154 618 Other assets, deferred charges and intangibles.......... 786 742 765 716 1,464

Total Assets 208,406 215,749 238,254 224,005 251,424


16

31 Dic

200431 Mzo

200530 Jun

200530 Sep

200531 Dic

2005Pasivo

Deposits .................................................................... 174,393 170,495 179,796 181,970 196,566 Demand deposits 110,109 100,973 102,820 103,708 118,811 Time deposits 64,284 69,522 76,976 78,262 77,755 Bank bonds outstanding - - - - -

Bank deposits and other liabilities ............................ 9,244 10,417 16,876 7,006 6,896 On demand 244 - - - - Short term 6,375 7,972 14,519 4,799 4,737 Long term 2,625 2,445 2,357 2,207 2,159

Settlement accounts to be recorded for sale - - - - - Securities and derivative transactions ....................... 32 359 5,665 2,963 4,507 Repurchase agreements 32 96 43 73 118 Settlement accounts to be recorded for purchase - 263 1,738 - - Stock borrowings - - 3,884 2,890 4,389 Derivative transactions - - - - -

Other accounts payable ............................................. 9,106 18,212 19,016 13,919 21,909 Income tax and employee profit sharing payable 683 424 154 318 1,201 Sundry creditors and others accounts payable 8,423 17,788 18,862 13,601 20,708

Subordinated debentures outstanding........................ 2,271 2,262 2,261 2,235 2,206

Deferred tax .............................................................. - - - - -

Deferred credits......................................................... 14 10 8 3 15

Total Liabilities ....................................................... 195,060 201,755 223,622 208,096 232,099

Stockholder´s Equity

Paid in capital............................................................ 10,317 10,317 10,317 10,317 12,517 Capital stock 3,498 3,498 3,498 3,498 3,773 Additional paid in capital 6,819 6,819 6,819 6,819 8,744 Mandatorily convertible subordinated

debentures - - - - - Capital Gains............................................................. 3,027 3,676 4,314 5,590 6,808 Capital reserves 1,955 1,955 4,583 4,583 4,583 Retained earnings - 3,190 - - - Surplus (Deficit) from securities 16 (304) 7 230 269 Results of foreign operations exchange 11 11 11 11 11 Cumulative effect of restatement (3,238) (3,300) (3,316) (3,307) (3,360) Gains on non monetary asset valuation Valuation of fixed assets 1,245 1,245 1,245 1,245 1,245 Valuation of permanent investments (152) (148) (142) (143) (139) Adjustments to retirement fund obligations - - - - - Net Income 3,190 1,027 1,926 2,971 4,199 Minority interest in capital ........................................ 2 1 1 2 - Total Stockholder’s Equity ....................................... 13,346 13,994 14,632 15,909 19,325 Total Liabilities and Capital .................................. 208,406 215,749 238,254 224,005 251,424


17

31 Dic

200431 Mzo

200530 Jun

200530 Sep

200531 Dic

2005Memorandum Accounts Guarantees granted 222 192 57 58 57)Other contingent obligations 9,654 11,350 11,758 5,124 976 Irrevocable lines of credit granted 2,257 3,154 2,820 3,218 3,761 Goods in trust or mandate 63,605 64,468 65,830 66,886 67,769 Goods in custody or under administration 50,567 52,137 61,578 62,098 56,937 Third party investment banking operations, net 25,624 32,713 28,522 16,681 16,866 Amounts committed in transactions with Fobaproa 983 889 1,070 470 123 Amounts contracted in derivative operations 94,648 194,456 196,579 254,176 205,915 Investments of retirement savings system funds 2,958 3,122 3,174 3,264 3,292 Integrated loan portfolio 115,148 119,799 131,940 121,721 131,294 Other control accounts 322,347 333,753 355,260 323,893 346,896 688,013 816,033 858,588 857,589 833,885 Securities receivable under repos 37,140 37,179 42,941 41,277 42,005 (less) Repurchase agreements (37,110) (37,211) (42,887) (41,255) (42,017) 30 (32) 54 22 (12 Reverse repurchase agreements 6,197 7,689 11,556 11,645 13,511)(less) Securities deliverable under repos (6,195) (7,735) (11,554) (11,628) (13,596 2 (46) 2 17 (85) The present income statement was prepared in accordance to the accounting principles for banking institutions, which are issued by the Mexican National Banking Commission as specified in Articles 99, 101 y 102 of the Law for Credit Institutions, of general observance and mandatory, applied in a consistent manner, this statement reflects all operations performed by the institution up to the date mentioned above, these operations were performed following healthy banking practice and following applicable legal and administrative requirements. The present statement has been approved by the Board of Directors under the responsibility of the signing officers. Historical paid in capital of the Institution amounts to MNX 2,278 millions. www.hsbc.com.mx, Section: English, HSBC Group, Investor Relations, Financial Information. www.cnbv.gob.mx/Sector Bancario/Instituciones de Crédito/Información Financiera de la Banca Múltiple, Section: Información Estadístic


18

Banking sector HSBC México, S.A.

Figures in MXN Millions

Consolidated Income Statement

For the quarter ending… YTD

31 Dic2004

31 Mzo2005

30 Jun 2005

30 Sep2005

31 Dic2005

31 Dic2004

31 Dic2005

Interest income 5,355 5,680 6,324 6,741 6,582 19,044 25,327 Interest expense (-) 1,989 2,133 2,804 2,903 2,626 7,111 10,467 Monetary position (margin), net (152) (39) (16) (54) (132) (273) (241)Net interest income ............................. 3,214 3,508 3,504 3,784 3,824 11,660 14,619

Loan-loss provisions (-) ...................... 274 240 373 479 397 1,363 1,489 Loan loss provisions bank 179 102 301 345 341 1,155 1,089 Loss sharing Fobaproa 95 138 72 134 56 208 400 Risk adjustment net interest income ... 2,940 3,268 3,131 3,305 3,427 10,297 13,130

Fees and commissions ........................ 1,969 1,721 1,800 1,981 2,061 7,181 7,564 Account management 387 365 377 400 373 1,615 1,516 Services 1,582 1,356 1,423 1,581 1,688 5,566 6,048

Fees Paid............................................. (253) (200) (226) (207) (246) (774) (879)

Trading Income................................... 244 218 285 413 439 907 1,356 Foreign exchange 193 (54) 445 214 265 569 870 Securities trading, net 75 49 (23) (23) (88) 243 (85) Repos 7 23 66 77 124 28 290 Swaps - - - - 11 - 11 Valuation off-shore agencies (31) 200 (203) 145 127 67 270 Total operating income ....................... 4,900 5,007 4,990 5,492 5,681 17,611 21,171

Administrative and personnel expenses (-)………………………..... 3,411 3,398 3,593 3,807 3,900

12,232 14,698

Personnel expense 1,497 1,452 1,622 1,818 1,750 5,350 6,641 Administrative expense 1,745 1,762 1,777 1,773 1,923 6,248 7,236 Depreciation and amortization 169 184 194 216 227 634 821 Net operating income.......................... 1,489 1,609 1,397 1,685 1,781 5,379 6,473

Other income 519 222 271 522 490 1,327 1,504 Other expenses (452) (168) (117) (466) (242) (1,062) (993)Net income before taxes. .................... 1,556 1,663 1,551 1,741 2,029 5,644 6,984

Income tax and employee profit sharing (542) (246) (381) (451) (305)

(1,196) (1,383)

Deferred income tax (228) (389) (197) (256) (499) (1,265) (1,341)Net income before subsidiaries........... 786 1,028 973 1,034 1,225 3,183 4,260

Undistributed income from subsidiaries 3 - 2 10 3

14 16

Income from ongoing operations ........ 789 1,028 975 1,044 1,228 3,197 4,276

Discontinued operations, extraordinary items and changes in accounting standards, net - - (78) - 1

(7) (77)Minority interest - - - - - - - Net income (loss)................................ 789 1,028 897 1,044 1,229 3,190 4,199

The present income statement was prepared in accordance to the accounting principles for banking institutions, which are issued by the Mexican National Banking Commission as specified in Articles 99, 101 y 102 of the Law for Credit Institutions of general observance and mandatory, applied in a consistent manner. This statement reflects all income and expenses derived from the operations performed by the Institution up to the date mentioned above. These operations were performed following healthy banking practice and following applicable legal and administrative requirements.The present statement has been approved by the Board of Directors under the responsibility of signing officers. www.hsbc.com.mx, Section: English, HSBC Group, Investor Relations, Financial Information. www.cnbv.gob.mx/Sector Bancario/Instituciones de Crédito/Información Financiera de la Banca Múltiple Section: Información Estadística.

Financial Information as of December 31 ,2005

19



Consolidated Statement of Changes in Shareholder’s Equity From January 1, 2005 to December 31, 2005 Paid in Capital Capital Gains

Capital stock

Unpaid Capital stock

Increase from re-

statement of paid-in

capital stock

Shares’ premium

Re-statement of shares’ premium

Capital Reserves

Re-statement

of statutory reserves

Retained earnings

Re-statement

of retained earnings

Surplus (Deficit)

from securities

Results of foreign

operations exchange

Cumulative effect of

restatement

Deficit in restatement of stock-holders’

equity


monetary assets(Valuation of fixed assets)


monetary assets

Valuation of permanent

investments)

Adjustments to

retirement fund

obligations Net income

Minority Interest

Total Stock- holders Equity

Balances as of December 31, 2004 2,004 - 1,395 5,127 1,499 1,036 863 - - 16 11 (3,147) - 1,210 (148) - 3,099 2 12,968 Movements Inherent to the Shareholders Decision

Subscription of shares 275 - - 1,925 - - - - - - - - - - - - - - 2,200 Capitalization of retained earnings - - - - - - - - - - - - - - - - - - -Transfer of result of prior years - - - - - - - 3,099 - - - - - - - (3,099) - -Constitution of reserves - - - - - 3,099 - (3,099) - - - - - - - - - - -Payment of dividends - - - - - (517) (32) - - - - - - - - - - - (550)Others - - - - - - - - - - - - - - - - - - -

Total 275 - - 1,925 - 2,582 (32) - - - - - - - - - (3,099) - 1,651 Movements for the Recognition of the Comprehensive Income Integral Income -Net result - - - - - - - - - - - - - - - - 4,199 - 4,199 -Surplus from mark to market of available for sale securities - - - - - - - - - 252 - - - - - - - - 252 -Result from translation of foreign operations - - - - - - - - - - - - - - - - - - - -Cumulative effect of restatement - - 99 - 193 - 134 - - 1 - - (215) 36 (4) - - - 243 -Gains on non-monetary asset valuation - - - - - - - - - - - - - - 13 - - - 13 -Adjustments to retirement fund obligations - - - - - - - - - - - - - - - - - - - -Others - - - - - - - - - - - - - - - - - (1) (1) Total - - 99 - 193 - 134 - - 253 - - (215) 36 9 - 4,199 (1) 4,707 Balances as of December 31, 2005 2,279 - 1,494 7,052 1,692 3,618 965 - - 269 11 (3,147) (215) 1,246 (139) - 4,199 1 19,325

The present statement of changes in stockholder’s equity was prepared in accordance to the accounting principles for banking institutions which are issued by the Mexican National Banking Commission as specified in Articles 99, 101 y 102 of the Law for Credit Institutions of General Observance and Mandatory, applied in a consistent manner. This statement reflects all movements in capital accounts derived from the operations performed by the Institution up to the date mentioned above. These operations were performed following healthy banking practice and following applicable legal and administrative requirements. The present statement has been approved by the Board of Directors under the responsibility of the signing officers. www.hsbc.com.mx, English, Investor Relations – Financial Information. www.cnbv.gob.mx/Sector Bancario/Instituciones de Crédito/Información Financiera de la Banca Múltiple, Section: Información Estadística.


20



Consolidated Statement of Changes in Financial Position From January 1, 2005 to December 31, 2005 Operating activities Net income (loss) ........................................................................................................................ 4,199Items included in operations not requiring (providing) funds: Depreciation and amortization 821 Allowance for loan losses 1,489 Provisions for foreclosed assets - Gains / (losses) from mark to market valuations (270) Deferred taxes 1,341 Undistributed income from subsidiaries, net (16) Allowance for decrease in property value 52 Increase (reduction) of the minority interest - Net Result of items included in operations not requiring (providing) funds.................... 7,618Changes in Operating Accounts: Increase (decrease) in retail deposit and money desk 22,173 Increase (decrease) of loan portfolio (17,156) Increase (decrease) of financial instruments (5,466) Increase (decrease) of other receivable and payable accounts, net 1,499 Funds provided by operations.......................................................................................... 8,668 Financing Activities: Subordinated debentures outstanding (64) Interbank and other loans (2,348) Dividends paid (561) Increase (decrease) in capital 2,200 Result from foreign currency transactions - Convertible subordinated debentures - Fiscal results of agencies - Funds used or provided by financing activities .............................................................. (773) Investing Activities: Increase (decrease) of property, furniture and equipment and long term investments (1,834) Increase (decrease) in deferred credits 240 Increase (decrease) in foreclosed assets 104 Funds used in investing activities………………………………………………………. (1,490)Increase (decrease) in cash and equivalents ............................................................................... 6,404Cash and equivalents at beginning of period............................................................................... 44,629Cash and equivalents at end of period..................................................................................... 51,033 The present statement of changes in financial position was prepared in accordance to the accounting principles for banking institutions, which are issued by the Mexican National Banking Commission, as specified in Articles 99, 101 y 102 of the Law for Credit Institutions of general observance and mandatory, applied in a consistent manner. This statement reflects all movements in funds derived from the operations performed by the Institution up to the date mentioned above. These operations were performed following healthy banking practice and following applicable legal and administrative requirements. The present statement has been approved by the Board of Directors under the responsibility of signing the officers. www.hsbc.com.mx, English, Investor Relations – Financial Information. www.cnbv.gob.mx/Sector Bancario/Instituciones de Crédito/Información Financiera de la Banca Múltiple, Section: Información Estadística.


21



Key Indicators For the quarter ending ...

31 Dec

200431 Mar

200530 Jun

200530 Sep

200531 Dec

2005

Non performing loans / total loans ratio … 3.0% 2.9% 2.7% 2.9% 2.7% Coverage ratio …..………………………. 195.1% 187.5% 179.0% 171.9% 167.9% Operating efficiency..................................................... 6.7% 6.4% 6.3% 6.6% 6.6% Net interest margin (NIM)............................................ 6.4% 7.0% 6.6% 7.2% 6.6% Return on average equity (ROE) ……… 24.0% 30.1% 25.1% 27.4% 27.9% Return on assets (ROA)................................................ 1.5% 1.9% 1.6% 1.8% 2.1% Capitalization ratio Credit risk.................................................................. 20.2% 19.6% 19.8% 19.2% 21.1% Credit and market risk ............................................... 13.7% 15.0% 14.6% 13.4% 14.3% Liquidity....................................................................... 73.7% 76.0% 71.5% 84.1% 83.0% Non performing loans / total loans ratio = Balance of non performing loans at quarter end / Balance of total loans at quarter end. Coverage ratio= Balance of provisions for loan losses at quarter end / Balance of non performing loans at quarter end. Operating efficiency = Annualized administrative expenses at quarter end / Average total assets. ROE = Annualized net income at quarter end / Average shareholder’s equity. ROA = Annualized net income at quarter end / Average total assets. Capitalization ratio = Net Capital / Risk weighted assets. Liquidity = Liquid assets / Liquid liabilities. Liquid Assets = Cash and deposits in banks + Trading securities + Available for Sale securities. Liquid Liabilities = Demand deposits + Bank deposits and other on demand + Bank deposits and other short term liabilities. NIM = Annualized net interest income / Average total assets. Performing Assets = Cash and deposits in banks + Investment in securities + Derivatve Operations + Performing loans. The averages utilized correspond to the average balance of the quarter in study and the balance of the previous quarter.


22

Variance Analisis of Balance Sheet and Income Statement Balance The Group's total assets increased nearly 21% versus prior year, driven by increases in loans and investments in securities and funded by growth in deposits. There was significant growth in investments in securities and derivative operations, benefiting from investments in technology that have permitted more complex transactions. This is a reflection of the Group's established strategy to reduce interest rate sensitivity and to strengthen the financial instruments portfolio. On the other hand, in August and September MXN 17 billion of Fobaproa notes payments were received, leading to gradual increases in the loan portfolio of approximately MXN 6 billion in both available liquidity and in investment in securities. Additionally, in December the level of regulatory deposits increased MXN 5 billion due to a Banxico requirement for higher deposits relating to the regulation of liquidity in the financial markets. The Group's performing loans observed significant growth during the year, especially in commercial and consumer loans which increased MXN 14 and MXN 9 billion, or 46 and 56% respectively. Mortgages registered 21% growth during the year, prompted by the launch of a competitive fixed rate campaign, as well as of products to take advantage of Infonavit resources. Even though the amount of performing loans decreased approximately MXN 17 billion during the third quarter due to the prepayment of Fobaproa notes, performing loans finished the year with 15% growth. The Group's loan portfolio benefited from solid growth in commercial and mortgage loans in its Panama subsidiary. The IPAB loan was reclassified to loans to government entities, which consequently increased the portfolio by MXN 29,684 million in the year. In the past year the bank's performing loans had solid performance, driven by 45% growth in commercial and nearly 58% in consumer loans. This was largely due to organic growth in vehicle finance (coupled with the purchase of a vehicle finance portfolio), an increase in the credits offered to PyME's tripling loans in 12 months, 84% growth in credit cards and more than the 100% growth in payroll loans. While performing loans grew nearly 15% in the last 12 months, non-performing loans remained flat. Versus the previous quarter, performing loans grew 8%, while non-performing loans decreased 2 percent. Property also grew significantly with HSBC's new headquarters, Torre Ángel, opening in 2006. It is also important to note the strong reduction in deferred taxes from MXN 2,274 million at December 31, 2004 to MXN 747 million by the end of 2005, representing a decrease of 67 percent. In the last quarter there was a solid increase in customer deposits due to December's seasonal effect. Versus prior year total customer deposits grew 15 percent. In the last quarter of the year alone, the Bank's deposits grew 8%. In the year time deposits in the Bank grew 21%, while demand deposits grew 8%, representing a change in the deposit mix. While in December 2004 time deposits represented 37% of total deposits, in 2005 this percentage grew to almost 40 percent. These positive results have contributed to a 21% increase in the Bank’s capital.


23

Income Statement Net Income Al the close of 2005, Grupo Financiero HSBC reported favorable results with an annual net income of MXN 4,981 million, representing 48% growth versus 2004. This increase is largely due to the contribution of the Bank with annual net income of MXN 4,200, followed by the Insurance Company with MXN 504 and the Panama subsidiary with MXN 202 million. In the last quarter of the year the Bank reached a net income of MXN 1,380 million, which represents a 27% increase versus prior quarter and a 56% increase versus the same quarter in 2004. This result was largely influenced by a strong increase in deposits and credits. Net Interest Income The Group's net interest income grew by 30% versus prior year driven by solid growth in commercial loans coupled with robust growth in deposits. In the last quarter the Group reported net interest income of MXN 3,824 million largely due to an increase in deposits and strong performance in packaged products like “Tu Cuenta”. Non-interest Income The Group's fees and commissions increased by 8% over prior year. The Bank contributed to this growth with strong performance in credit cards, electronic banking, ATMs, membership programs, remittances and bank loans. Packaged products such as Estímulo directed to support small and medium businesses and innovative launches like La Efectiva- a debit card for sending remittances, or Venta Driecta- a product that permits the sale of used cars among clients utilizing HSBC's financing and its internet as the intermediary, have performed an important role in fees and commissions growth. Trading income increased by 49% versus prior year and 16% versus prior quarter in spite of maintaining conservative risk positions in the financial markets. This was driven by strength in retail foreign exhange and proper positioning in the money market. Provisions Provisions grew by 14% versus prior year, in line with the growth in the loan portfolio and reflecting better credit quality and macroeconomic conditions. In the Bank non-performing loans to total loans decreased from 3.0% in prior year to 2.7% in 2005 and the coverage ratio was 168%. Administrative Expenses During the year administrative expenses grew by 22%. This increase reflects a growth in the number and training of personnel, greater investments in technology, an increase in the variable incentive payment tied to revenue growth and in promotion (marketing) expenses. HSBC now counts on its sufficient infrastructure to grow organically: young and qualified personnel, one of the best networks of ATMs and branch offices with the most extensive hours in the market, a new and improved operations center and a new corporate headquarters.


24


Financial Instruments At December 31, 2005

31 Dec

200431 Mar

2005 30 Jun

200530 Sep

2005 31 Dec

2005

Government securities 930 270 236 3,261 5,652 Fiduciary certificates - - - - -Bank securities 2,091 28 29 1,467 1,219Shares 21 17 17 17 18Sovereign government debt bonds - - - - -Others 23 51 64 92 57Trading securities.................................................. 3,065 366 346 4,837 6,945 Government securities Fiduciary certificates 33,287 25,905 31,964 29,528 31,699 Bank securities 2,072 2,029 2,018 2,022 3,133Obligations and other securities 321 310 1,953 4,241 3,912Shares 4,635 5,310 6,636 5,351 7,089Available for sale securities .................................. 20 18 17 10 189 40,334 33,573 42,588 41,153 46,022 Sovereign debt securities 828 726 706 586 577 Commercial and industrial subordinated debentures 2 2 2 2 2 Special Cetes (net) 3,148 3,188 3,278 3,344 3,366 Myras 169 98 82 61 48 Other debt securities - - - - - Securities held to maturity .................................... 4,147 4,015 4,068 3,993 3,993 Total Financial Instruments .................................. 47,546 37,954 47,001 49,983 56,960 In the fourth quarter of 2005 there was an increase in investment in securities of MXN 6,977 versus prior quarter. This is mainly due to MXN 4,562 million in government securities (mainly in bonds and cetes), in Pagarés with liquidable return of MXN (586) at maturity, an increase of MXN 1,738 in UMS Global and others of MXN 1,263.


Repurchase Agreements At December 31, 2005

31 Dec

2004 31 Mar

200530 Jun

2005 30 Sep

2005 31 Dec

2005

Government securities (debit) 36,767 39,078 40,883 38,919 42,769Bank securities (debit) 2,917 619 3,103 4,465 1,618Bank securities (own) - - 1,502 390 -Valuation Increase (decrease) 74 (5) 89 75 20Interest in securities receivable under repurchase agreements 17 13 35 (11) 27 Total in repo agreements (debit) ……………………. 39,776 39,705 45,612 43,839 44,434 Repo´s Government securities (credit) 36,770 39,079 40,884 38,928 42,772Repo´s Bank securities (credit) 2,917 619 3,103 4,465 1,618Repo´s Bank securities (own) - - 1,502 390 -Valuation increase (decrease) 1 (1) 2 3 3


25

Accrued interest payable 61 41 67 40 57Credit balance in repo agreements ………................... 39,749 39,738 45,559 43,827 44,450 Repurchase agreements in government securities 8,812 10,198 14,226 13,697 15,899Repurchase agreements in banking securities - - - 507 -Valuation increase (decrease) 1 - 2 3 3Accrued interest receivable 23 17 1 9 42Debit balance repo securities agreements …………… 8,836 10,216 14,230 14,217 15,944 Government securities 8,810 10,198 14,224 13,686 15,895Bank securities - - - 507 -Valuation increase (decrease) 4 (44) 4 20 (84) Interest in securities deliverable under repurchase agreements 22 15 2 9 44Credit balance repo securities agreements …………... 8,836 10,169 14,231 14,223 15,855


Figures in MXN millions Derivative Financial Instruments At December31, 2005

Futures Forwards Contracts Options

Swaps

Asset

positionLiabilityposition

Asset position

Liability position

Asset position

Liability position

Asset position

Liability position

Asset position

For trading................... Pesos - - 67,136 61,032 - - - - 6,104 US Dollars - - 75,093 81,090 1,375 1,329 40,174 41,197 (6,974) Interest Rate 22,638 22,638 - - - - 168,377 167,125 1,252Total 22,638 22,638 142,229 142,122 1,375 1,329 208,551 208,322 382 For hedging ................. Pesos - - - - - - 2,015 - US Dollars - - - - - - - 2,000 Interest Rate - - - - - - 193 187 Total - - - - - - 2,208 2,188

Banking sector

HSBC México, S.A. Figures in MXN millions

Stock Borrowings At December 31, 2005

Received borrowings 31 Dec

200431 Mar

2005 30 Jun

200530 Sep

2005 31 Dec

2005 Cetes - - - 936 216 Increase or decrease in cetes - - - - -Bonds - - 4,053 1,956 4,168Increase o decrease in bonds - - (168) (2) 3Total............................................................. - - 3,884 2,890 4,388


26


Participation by Subsidiary Group Subsidiaries at December 2005 Number of

Shares owned by subsidiaries

Participation Percentage

Number of Shares owned by

HSBC Group HSBC México, S.A. Institución de Banca Múltiple 1,139,215,231 99.99% 1,139,116,640HSBC Seguros, S.A. de C.V. 392,200 99.99% 392,199HSBC Afore, S.A. de C.V. 225,500 99.99% 225,499HSBC Fianzas, S.A. 759,990,753 97.22% 738,883,014HSBC Casa de Bolsa, S.A. de C.V. 72,727,272 99.99% 72,727,271HSBC Operadora de Fondos, S.A. de C.V. 1,000 99.90% 999HSBC Bank Panamá S.A. 1,000,000 100.00% 1,000,000 Total 1,973,551,956 1,952,345,622



Trading Income For the quarter ending . . . YTD . . .

31 Dec2004

31 Mar2005

30 Jun2005

30 Sep2005

31 Dec2005

31 Dec2004

31 Dec2005

Valuation (32) 195 (199) 142 119 59 257 Derivatives 3 221 (236) 69 69 65 218 Repos (34) (27) 55 52 52 (8) 38 Shares - - - - - - - Debt Securities (1) (1) (18) (3) (3) 2 - Buying and Selling Instruments 271 19 480 265 325 802 1,089 Foreign Currency 189 (52) 437 212 264 542 861 Derivatives 2 (4) (5) 6 14 - 11 Repos 88 28 48 70 (46) 130 100 Shares - - - - - 6 - Debt Securities (8) 47 - (23) 93 124 117 Total .................................................. 239 214 281 407 444 861 1,346


Loan Portfolio By type of currency At December 31, 2005

IPAB

Commercial Loans

Financial Intermediaries

Consumer Loans

Mortgage Loans

Government Loans

Performing Loan Portfolio Pesos 29,292 6,573 23,954 11,437 34,872 1,096 US Dollars 11,442 224 - 4 1,290 -


27

Udis Banxico - - - 3,878 - - Subtotal ......................... 40,734 6,797 23,954 15,319 36,162 1,096 Panama 5,018 99 1,706 4,781 - - Total………………..... .. 45,752 6,896 25,660 20,100 36,162 1,096

Commercial

LoansFinancial

IntermediariesConsumer

LoansMortgage

Loans Government

LoansIPAB

Non Performing Loans Portfolio Pesos 1,218 - 807 434 - - US Dollar 433 - - - - - Udis Banxico - - - 521 - - Total.............................. 1,651 - - 807 955 - - Panama 43 - 11 66 - - Total………………..... . 1,694 - 818 1,021 - -



Loan Portfolio Grading At December 31, 2005 Allowance for Loan Loses per category Loan

Portfolio Commercial

Loans Loan

PortfolioCommercial

Loans Loan

Portfolio Exempted from rating 30,623,545 Graded............... 100,670,120 “A” Risk 67,443,389 246,599 234,602 123,137 604,338

A-1 Risk 29,133,492 1,451,720 237,955 55,006 1,744,681 A-2 Risk 1,304,227 205,141 257,818 59,103 522,062 “B” Risk 1,808,551 278,951 564,968 439,467 1,283,386

B-1 Risk 980,461 820,294 94,386 62,078 976,758B-2 Risk 131,293,665 3,002,705 1,389,729 738,790 5,131,224B-3 Risk

Constituted Reserves................................................................................................................ 5,729,773Surplus ..................................................................................................................................... 598,549

1. The last day month figures, corresponding to the balance sheet at 31 December 2005, are the ones used to grade and establish the reserves. 2. The lending portfolio is graded according to the rules for grading lending portfolios issued by the Secretaría de Hacienda y Crédito Público (SHCP – Mexican Government’s Secretary of Public Lending) and to the methodology established by the CNBV (Mexican Banking and Securities National Committee), and if it is the case, according to the internal methodology authorized by the CNBV. For the second stage of the commercial lending portfolio, the institution will use the CNBV methodology, published on August 20, 2004. For the Consumer Lending portfolio and the Mortgage portfolio, the Institution will use the methodology of the circular published on December 2, 2005. 3. The surplus in constituted reserves is explained by: $598,549 in other reserves for the mortgage portfolio.


28

Banking sector


Non-performing Loans For the quarter ending… 31 Dec

200431 Mar

2005 30 Jun

2005 30 Sep

2005 31 Dec

2005

Initial balance of non performing loan portfolio

3,946 3,280 3,324 3,423 3,433

Increases 3,701 3,337 3,876 6,762 2,393 Transfer of current loans to past due status 3,701 3,337 3,876 6,762 2.393 Purchase of portfolio - - - - - Suspended interest - - - - - Decreases (4,377 ) (3,300 ) (3,757 ) (6,756 ) (2,419 ) Restructurings (72 ) (5 ) (5 ) (58 ) (28 ) Liquidated credits (3,383 ) (2,413 ) (3,282 ) (6,289 ) (2,044 ) Charged in cash (2,496 ) (2,094 ) (2,902 ) (5,556 ) (1,449 ) Foreclosed assets (6 ) (14 ) (2 ) (29 ) (3 ) Debt capitalized in the bank’s favour - - (1 ) - - Writeoffs (881 ) (306 ) (377 ) (704 ) (593 ) Sale of portfolio (207 ) - - - - Transfer to performing loan status (715 ) (882 ) (470 ) (410 ) (347 ) Fx revaluations 10 7 (20 ) 4 5 Interest capitalization - - - - - Final Balance of Non Performing Loan Portfolio

3,280 3,324 3,423 3,433 3,413


Deferred Taxes 31 Dec

2004 31 Mar

2005 30 Jun

2005 30 Sep

2005 31 Dec

2005 Loan loss reserves 2,232 1,874 1,593 1,360 941 Valuation of securities (40) 158 (22) (213) (294) Fiscal loss 77 97 78 60 133 Loss sharing 2,144 2,173 2,189 2,216 833 Other - - - - 461 147 78 167 115 194 Differences in rates of fixed assets (374) (367) (357) (230) (289) Fiscal result UDIS-Banxico (1,912) (1,936) (1,962) (2,030) (1,232) 2,274 2,077 1,686 1,278 747 Total Deferred Taxes Loan loss reserves 2,232 1,874 1,593 1,360 941


29



Funding, Loans and Investment in Securities Funding and bank loans – Average Interest rates

For the quarter ending…

31 Dec

2004 31 Mar

2005 30 Jun

2005 30 Sep

2005 31 Dec

2005 Loans in MXN pesos Funding 2.43% 2.71% 3.27% 3.46% 3.17% Bank and other loans 7.23% 8.09% 9.16% 9.01% 8.04% Loans in foreign currency Funding 0.56% 0.69% 0.62% 0.68% 0.80% Bank and other loans 2.86% 3.19% 3.65% 4.51% 4.77% UDIS Funding 0.81 % 0.64% 0.27% 0.22% 0.20%



Long Term Debt HSBC has long term non-convertible subordinated debentures. These instruments pay monthly interest at a rate equivalent to the average 28-day TIIE (interbank rate) of the previous month. Instrument Issue Date Amount Currency Amount in circulation MaturityDate MXN millions MXN millions INTENAL 03 24-NOV-2003 2,200 MXN 2,200 25-NOV-2013 2,200 2,200


Capital Grupo Financiero HSBC, S.A. de C.V. (Group) The ordinary shareholders meeting, held on April 21, 2005, approved the application of the year’s financial year results, amounting to MXN 3,370 m, as per the following:

• MXN 169m (5%) to increase legal reserves, and the remaining MXN 3,202 m, at the disposal of the Board under the concept of the previous year’s financial years.

Subsidiaries: HSBC México, S.A. (Bank) The ordinary shareholders meeting, held on April 21, 2005, approved the application of the year’s financial results, totalling MXN 3,190 m, as per the following:


30

• MXN 319 m (10%) to increase legal reserves, and the remaining MXN 2,871 m, at the disposal of the Board under the concept of other reserves.

Dividends HSBC México, S.A., paid a dividend of 0.549058 per share for all 1,001,715,231 of its shares in circulation equivalent to MXN 550 million in July 2005, charged to fiscal net income. Share Subscriptions The assembly of shareholders on November 17, 2005, approved to increase the capital stock in the following form:

• MXN 275 by means of the emission of 137,500,000 shares that were subscribed and paid for in cash worth $16 pesos, from which $2 pesos corresponded to capital stock and the remaining balance to the shareholder's premium, for which the shareholders had the right to subscribe and to pay 137.2646 shares for each 1,000 shares they own.

The capital stock increased to MXN 2,278, representing 1,139,215,231 shares. HSBC Brokerage House The ordinary shareholders meeting, held on April 21, 2005, approved the application of the year’s financial results, totalling MXN 11 m, as per the following:

• MXN 0.545 m (5%) to increase legal reserves, and the remaining MXN 10.4 m, at the disposal of the Board under the concept of the previous year’s financial results



Capital Ratio

31 Dec

200431 Mar

200530 Jun

200530 Sep

200531 Dec

2005 % of assets subject to credit risk Tier 1 16.11% 16.11% 15.99% 15.77% 17.81% Tier 2 4.13% 3.45% 3.77% 3.42% 3.33% Total regulatory capital ........................... 20.24% 19.56% 19.76% 19.19% 21.14% % of assets subject to credit and market risk Tier 1 10.90% 12.32% 11.80% 10.97% 12.06% Tier 2 2.79% 2.64% 2.78% 2.38% 2.26% Total regulatory capital ........................... 13.69% 14.96% 14.58% 13.35% 14.32% Tier 1 12,176 13,017 13,656 14,990 18,128 Tier 2 3,123 2,788 3,223 3,248 3,392 Total regulatory capital ................................ 15,299 15,806 16,879 18,238 21,520 RWA credit risk 75,586 80,791 85,402 95,023 101,805 RWA market risk 36,135 24,867 30,384 41,588 48,428 RWA credit and market risk......................... 111,720 105,659 115,786 136,612 150,233 In accordance with the general rules referred to in the Article 134 bis of the Lending Institution Law, HSBC México, S.A. is classified as category I for presenting a 14.3% capitalization rate in the fourth quarter of 2005. .


31

Casa de Bolsa, S.A. de C.V.


Capital Ratio (Brokerage House)

31 Dec

200431 Mar

200530 Jun

200530 Sep

200531 Dec

2005 % of assets subject to credit risk Tier 1 159.3% 157.1% 174.6% 219.6% 198.1% Total regulatory capital.................................... 159.3% 157.1% 174.6% 219.6% 198.1% % of assets subject to credit risk Tier 1 111.9% 117.9% 129.4% 151.9% 126.5% Total regulatory capital.................................... 111.9% 117.9% 129.4% 151.9% 126.5% Tier 1 97 101 112 125 105Tier 2 - - - - -Total regulatory capital ................................ 97 101 112 125 105 RWA credit risk 61 64 64 57 53RWA market risk 26 21 22 25 30RWA credit and market risk......................... 87 85 86 82 83


Other Expenses, Other Income and Extraordinary Items For the quarter ending… YTD…

31 Dec2004

31 Mar2005

30 Jun2005

30 Sep2005

31 Dec2005

31 Dic2004

31 Dic2005

Other income Loans to employees 10 12 14 17 19 40 63 Recoveries 390 27 39 16 6 815 88 Other income 136 183 224 522 416 508 1,344 Result from monetary position (other income) - - 3 (3) - - - 536 222 280 552 441 1,363 1,495 Other expenses Other losses (429) (170) (123) (466) (255) (914) (1,014) Result from monetary position (other income) (29) (3) 2 - (6) (162) (7) (458) (173) (121) (466) (261) (1,076) (1,021) Total other income (expenses) .............. 78 49 159 86 180 287 474 Discontinued operations, extraordinary

items and changes in accounting standards .................................... - - (78) - -

(7) (78)


32



Related Party Transactions In the normal course of its operations, the HSBC Group carries out transactions with related parties and members of the Group. According to the policies of the Group, all loan operations with related parties are authorized by the Board and they are negotiated with market rates, guarantees and overall standard banking practices. The balance of the transactions carried out as of December 31, 2005 is shown below:

Bank

Afore

Brokerage House

Investment Funds

Operator

Group

Total

Balance Cash and Balances at central/other banks and items in the course of collection

- - 1 - - 1

Deposits (liabilities) (1) - - - - (1)Repos 5 - 5 - - 10Reverse repos (5) - (5) - - (10)Sundry debtors (assets) - - - -

-

-

Sundry creditors (liabilities) - - - -

- -

Total (1) - 1 - - - Results Payable commissions (2) (2) (38) (3) - (45)Receivable commissions 36 - 4 5 - 45Administrative services (11) (20) (32) (4) - (67)Other income 55 12 - - - 67

Total 78 (10) (66) (2) - -


Information on Customer Segment and Results Consolidated Income Statement by Customer Segment The consolidated income statement by customer segment includes Personal Financial Services (PFS), Commercial Banking (CMB), Corporate, Investment Banking and Markets (CIBM), and other corporate activities (OAC). The following is a brief description of the customer segments: Personal Financial Services (PFS) – retail banking operations focusing on the individual by offering a the complete spectrum of financial needs from checking/deposits accounts to credit cards, personal and auto loans, and mortgages, among others. Commercial Banking (CMB) – CMB covers all small and medium sized companies by offering lending in Mexican Pesos and other currencies, lines of credit for working capital, export financing, in addition to trade services, fiduciary and other financial services, among others.


33

Corporate, Investment Banking and Markets (CIBM) – This segment includes product lines directed towards large, multinational corporations and consists of treasury and custody services, corporate finance advising, risk administration, trade services, and money market and capital investments. Other Corporate Activities – This segment includes other business structural operations not covered in the above categories as profit obtain from the rent of corporate buildings, sale of fixed assets and non-performing loans, when they no longer belong to any other segment, centrally registering recovered interests and loan provisions from this segment. The consolidated incomes statement information condensed by segments as of December 31, 2005, is shown below: December 2005 PFS CMB CIBM OAC Total Net Interest Income 9,003 2,731 1,788 1,671 15,193Provision for Loan Loss (85 ) 9 - (1,422) (1,499) Net Interest Income adjusted 8,918 2,740 1,788 248 13,694 Fees and Commissions, net 4,704 1,641 385 789 7,518Trading Income 299 66 980 17 1,363 Total Revenue 13,921 4,447 3,153 1,054 22,575 Administrative Expenses 11,547 2,460 1,179 644 15,830 Operating Income 2,374 1,987 1,974 410 6,745 Other Income (Expenses), net - 5 7 462 474Taxes (989 ) (816 ) (828 ) (204 ) (2,837) Net Income before subsidiaries 1,385 1,176 1,153 668 4,382 Undistributed income from subsidiaries

17 - - 642 659

Continued Operating Results - - - 16 16 Discontinued Operating Results - - - (76 ) (76) Net Income 1,402 1,176 1,153 1,250 4,981 Minority Shareholders - - - - - Participated Net Income 1,402 1,176 1,153 1,250 4,981


34

Banking sector


Market Risk Management The measures and quantitative information presented are in accordance with CNBV (Mexican Banking and Securities Commission.) regulations, related to the disclosure of policies and procedures established by credit institutions for market risk management. In accordance with the “Circular de Disposiciones Prudenciales en material de Administración Integral de Riesgos”, published by the CNBV, the bank recognizes basic rules for an efficient market risk management, evaluating them under quantifiable (credit, market and liquidity) and non-quantifiable (operation and legal) risks, and under the vision of satisfying the basic processes of identifying, measuring, monitoring, limiting, controlling, and communicating. Qualitative Information Description of the qualitative aspects related to the Integral Administration of Risks processes: Market risk administration at HSBC consists of identifying, measuring, watching, limiting, controlling, reporting and revealing the different risks that the institution faces. The Board of Directors includes a Risk Committee that manages risk and ensures that the operations are executed in accordance with the objectives, policies and procedures for prudent risk administration, as well as within the specific global limits set out by the Board. Market risk is defined as “the risk that the rates and market prices on which the Group has taken positions – interest rates, exchange rates, stock prices, etc.- will oscillate in an adverse way to the positions taken, thereby causing losses for the Group”, that is to say, the potential loss by changes in the risk factors will impact the valuation or the expected results of asset and liability operations or causes of contingent liabilities, such as interest rates, exchange rates, and price indices, among others. The main market risks facing Group can be classified as follows:

• Foreign exchange or currency risk. - This risk arises in the open positions on different currencies to the local currency, which generates an exposure to potential losses due to the variation of the corresponding exchange rates.

• Interest rate risk. - Arises from asset and liability operations (real nominal or notional), with different

expiration dates or re-capitalization dates. . • Risk related to shares. - This risk arises from maintaining open positions (purchase or sale) with shares or

share-based instruments, causing an exposure to changes in share prices and the instruments based on these prices.

• Volatility risk. - Arises in the financial instruments that contain options, in such a way that the price (among

others factors) depends on the perceived volatility in the underlying price of the option (interest rates, actions, exchange rate, etc.).

• Basic or margin risk. - This risk arises when an instrument is utilized for hedging and each one of them is

valued with different rate curves (for example, a governmental bond hedge with a by-product of inter-bank rates) so that its value to market can differ, generating imperfections in the cover.


35

Main elements of the methodologies employed in the administration of market risk: HSBC has elected to use Value at Risk (VaR) and the “Present Value of a Basis Point “(PVBP) in order to identify and quantify Market Risk. Both measures are monitored daily, based on market risk exposure limits set by the Board of Directors and marking-to-market all trading positions. Value at Risk (VaR) The VaR is a statistical measure of the worst probable loss in a portfolio due to changes in the market risk factors of the instruments for the given time period. The calculation of VaR uses a confidence level and a time horizon. The VaR is obtained by Monte Carlo simulation, capturing the potential losses by movements in all the market risk factors. The Board of Directors, at the suggestion of the Risk Committee, has determined a confidence level of 99% with a time period of one working day. Present value of a Basis Point (PVBP) and Forward PVBP (F-PVBP) The PVBP is a measure of market risk exposure to movements in interest rates. This measure illustrates the potential loss by movements of a basis point in interest rates on the pricing of assets and financial liabilities. The Forward PVBP (F-PVBP) measures the effect of movements in interest rates on applicable financial instruments. In this sense, the F-PVBP assumes the setting under which the implied forward rate curve increases by one basis point. Extreme Conditions Tests (Stress Test) These are models that take into account extreme values that sporadically occur but are highly improbable. The generation of stress scenarios in HSBC, for the analysis of the sensitivity of positions and their risk exposure to interest rates, is carried out by considering hypothetical settings. Both negative and positive changes in interest rates are considered in order to fully measure the impact on the different portfolios. Validation and Calibration Methods for Market Risk models: Any model is subject to possible erroneous or slanted results by diverse causes such as the poor quality of data, deficient specification of the model, miscalculations or simply because reality was different than the presumptions in the model. In order to detect a defect in the forecast quality of a model, systems automatically loads data, instead of doing so manually. Also, to test the confidentiality of the VaR calculation model, backtesting is carried out. This is a test that consists of forecasting the maximum possible loss amounts, contrasting the losses/gains that would have been generated versus the actual portfolio during the VaR’s time horizon. On average, the losses do not exceed the confidence levels established. The backtesting is reinforced by carrying out a hypothesis test. For the case of the PVBP, this has been compared with the sensitivity of the portfolio with the market quotations. The results obtained in the tests have shown that the models are dependable. With the purpose of reinforcing the validation and verification of the different risk factors, a matrix has been designed that shows the behavior of various risk factors in order to ensure that these are reasonably related to the predominant values in the financial markets and to verify the consistency between their present value and their value on the previous working day. Applicable portfolios: The Market Risk area calculates the VaR and the PVBP for the total Bank portfolio and for the specific Accrual and Trading portfolios, with the purpose of watching their own positions and the negotiation positions. The VaR is presented in global form for each portfolio mentioned and is also itemized for risk factors (Interest Rates and Exchange Rates). The PVBP is itemized by rate type (pesos, dollars and Real UDIS-RATE). Also the Forward PVBP is presented by segment of the forward curve (Buckets), so much for rates in pesos as for rates in dollars. The stress tests are carried out for the Bank’s portfolio, and for the “Trading” and “Accrual” portfolios; also, a special stress test for the Available for the Sale Securities (AFS) and the Hedging Securities (CFH) is carried out.


36

Quantitative Information Below, the market VaR and the Bank’s PVBP will be presented and their subdivisions in the “Trading” and “Accrual” portfolios for the third quarter of 2005 (in millions of dollars). Value in Risk of Global Market (VaR) (Considering all the Risk Factors) 30 Sep 05 31 Dec 05 Limits*

3Q 2005 Average

4Q 2005 Average

Bank (8.07) (6.17) 30.000 (8.16) (6.14)Accrual (4.76) (5.78) 27.500 (5.69) (4.91)Trading (4.32) (3.05) 13.500 (3.05) (2.72)

MMT (2.82) (1.45) 7.500 (2.42) (1.65)Fx (0.02) (0.35) 13.500 (0.10) (0.69)Money Desk (1.64) (2.30) 13.500 (0.95) (1.49)

* Absolute Value NA = Non Applicable The market VaR of the bank for 4Q05 varied 23.64% versus prior quarter. During the period, the levels of market VaR were maintained under the pre-established limits.

MARKET VALUE COMPARISON*

8.16

5.69

3.05

6.14

4.91

2.72

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

Bank Accrual Trading

VaR

(USD

mill

ions

)

3Q05 4Q05

Variation-24.51%

Variation-13.53%

variation-10.49%

*Figures in MXN millions, absolute value


37

Comparison of Market VaR vs. Net capital Below a chart comparing the market VaR versus net capital is presented for the last two quarters of 2005 (in millions of dollars). 30 Sep 05 31 Dec 05 VaR Total * 8.16 6.14Net Capital ** 1,658.23 2,023.68VaR / Capital Neto 0.49% 0.30% * The Bank’s quarterly VaR average in absolute value ** The Bank’s Net Capital at the close of the quarter The net capital of 4Q05 varied 22.04% versus prior quarter. The average market VaR represents 0.30% of the net capital in 4Q05 and 0.49% in 3Q05 (a change of 19 basis points). Present value of a Basis Point (PVBP) for Rates in Pesos

30 Sep 05

31 Dec 05

Límites* 3Q 2005 Average

4Q 2005 Average

Banco (0.508) (0.503) 0.550 (0.432) (0.381)Accrual (0.368) (0.360) 0.600 (0.350) ( 0.294)Trading (0.140) (0.144) 0.200 (0.082) (0.087)

Mesa de dinero (0.140) (0.144) 0.200 (0.082) (0.087) * Valor absoluto The Bank’s PVBP for 4Q05 varied 0.98% versus prior quarter. During the period, the levels of market VaR were maintained under the pre-established limits. .

PVBP AVERAGE VARIANCE*

0.29477.17%

ACCRUAL

0.35081.02%

ACCRUAL

0.08722.83%

TRADING

0.08218.98%

TRADING

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

0.500

3Q05 4Q05

PVB

P

PVBP Total Variation

*Figures in MXN millions, absolute value Bank’s average PVBP for 4Q05 varied 11.81% con respecto al PVBP promedio del trimestre anterior. versus prior quarter. During the period, the levels of market VaR were maintained under the pre-established limits.


38



Accounting differences in IAS vs. Mexican GAAP Summary of the main differences between the profit attributable to shareholders’ reported by Grupo Financiero HSBC S.A. de C.V. under Mexican GAAP and International Accounting Standards (IAS). On January 1, 2005, HSBC adopted to convert their financial information to International Accounting Standards (IAS). In Mexico, the consolidated financial statemens have been prepared according to the accounting polices established by the National Banking Commission (CNBV), which has some differences with the accounting principles generally accepted in Mexico (PCGA).

Accounting Differences in IAS vs. Mexican GAAP Millones de pesos corrientes Anual 05 4T05 3T05 2T05 1T05 Grupo Financiero HSBC – Net Income Under CNBV criteria 4,981 1,430 1,346 1,052 1,153

- Inflationary effects 494 196 144 54 101

- Temporary differences in the classification and valuation of hedging derivatives *

72 - - 89 (17)

- Differences in the accounting and valuation of Pensions and Post Retirement Healthcare benefits *

82 31 17 24 9

- Temporary differences in the recognition of deferred commissions paid, relative to the Afore Business *

121 54 25 29 13

- Temporary differences in the recognition of fees and commissions income *

(112) (25) (46) (4) (38)

- Temporary differences in the recognition and provisioning for credit losses *

47 47 - - -

- Purchase Accounting valuation adjustment related to Fobaproa notes earning below market rates *

(18) (306) (24) 258 55

- Purchase Accounting valuation adjustment related to Fobaproa notes earning below market rates * 1,338 475 313 315 236

- Other differences in accounting principals * 401 286 44 1 70 Net Income under IFRS 7,408 2,187 1,820 1,819 1,582 USD Equivalent (millions) 680 204 170 170 142 Plus taxes 2,949 713 755 786 695

PBT (IFRS) 10,356 2,900 2,575 2,604 2,277

USD Equivalent (millions) 951 271 240 244 204

Exchange change rate 10.89 10.71 10.71 10.68 11.18 * Impact shown net of taxes at 30%


39

Relevant Concepts related to

a) Differences in the Results GF HSBC, S.A de C.V. registered a net income of MXN 4,981 millions for 2005, different from the figures registered by HSBC Holding plc. of MXN 7,408 millions. The main differences between these figures are as follows:

1. Mexican Financial Institutions prepared and present their financial statements in accordance to accounting principles established by the CNBV (“in most cases are similar to PCGA in Mexico), which differ in certain aspects from the International Accounting Standards (IAS). The differences between both accounting principles, can be grouped as follows:

a) Temporary differences, registered only in the moment when some expenses or incomes are recognized. Nevertheless, revenues reported by the entity are the same along the life of the financial instrument or loan.

b) Items originated by accountant criteria and that are permanent. Specifically this includes re-statement and other derivative effects of inflationary effects, like repomo in the case of the CNBV criteria, and intangibles amortization, goodwill, and other items related to IFRS application.

2. Some concepts included in figures reported by HSBC Holding, plc., are not part of the results

from entities and legal vehicles that consolidate with Grupo Financiero HSBC, S.A. de C.V.

b) Main Differences in the Account Record Criteria

1. The impact of inflationary effects under Mexican GAAP has to be adjusted so that historical numbers are shown in real terms. Under Mexican GAAP the financial statements disclose an account called “Monetary Positions Gain (losses)”, derived from the differences between the monetary assets and liabilities. This does not exist under IAS.

2. Differences between the disclosure and the valuation of hedge derivatives. Under Mexican

GAAP the valuation of an instrument has to be recorded next to the primary position recorded; under IAS the valuation must be recorded against equity as hedge derivatives are classified as cash flow hedges.

3. Differences in the loan portfolio’s valuation and classification. The calculation methodology

under IAS is different than under Mexican GAAP.

4. Differences in labour obligation classification and valuation. The assumptions used in the actuarial calculation under IAS are different from Mexican GAAP.

5. Amortization of the fair value determined under the purchase accounting method, derived from

the acquisition of “Grupo Financiero Bital S.A. de C.V.”

6. Differences in the goodwill valuation and classification, and technical reserves of the Insurance business. The method used under IFRS differs from the ones established by local authorities.

Documents

GRUPO FINANCIERO HSBC, S.A. DE C.V. FINANCIAL REPORT AS … · GRUPO FINANCIERO HSBC, S.A. DE C.V. FINANCIAL REPORT AS OF DECEMBER 31, 2005 2005 Results - Highlights ... brand, our